AIG Given Sweetheart Deal by NY Fed

Its pretty obvious to students of the financial meltdown in 2008 that the government blinked when confronted by the banksters armed with "weapons of mass financial destruction" (credit default swaps). AIG was literally drowning in collateral calls on the billions of CDS it wrote. Perhaps scared out of their wits, or simply helping out distressed colleagues and friends, the New York Federal Reserve gave AIG par value for its CDS junk when the New York insurance regulator had mediated deals at 13¢ because a default by AIG would have resulted in financial chaos. This is how the GAO described the situation in its September 2009 report on the crisis:

Critics of the government’s assistance have noted that by providing assistance to AIG for the purpose of providing or returning cash collateral to counterparties, the government was indirectly assisting the counterparties, and they questioned the efficiency of this approach. Some noted that banks that had bought CDS contracts from other failed insurers were paid 13 cents on the dollar in deals mediated by New York’s insurance regulator, whereas AIG’s counterparties were paid market value. They said that new capital to AIG in effect served as direct infusions to the counterparties, including foreign financial institutions [notably Societe Generale and Deutsche Bank]. Conversely, Federal Reserve officials believed that if AIG had failed to pay the collateral amounts due, it would have been in default of its agreements, which could have resulted in AIG’s counterparties forcing it into bankruptcy. Moreover, they believed that the unfolding crisis warranted swift action to prevent a total collapse of the financial system given its fragile state at that time.

Essentially, the government was forced into the corner by the free-booting banksters who created the Wild West private debt machine with the blessing of Alan 'Fedspan' and his cohorts. "Help us, patriots all, or die!" was their cry, and Timmy said "Sirs, aye, aye", despite Goldman Sachs being fully hedged against their AIG exposure. CFO David Viniar told investors in a conference call that Goldman was protected: "We limited our overall credit exposure to AIG through a combination of collateral and market hedges. There would have been no credit losses if AIG had failed."